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  1. #21
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    If you subscribe to the "doubles in price every ten years" theory you are not alone.

    On page 9 of "...making money in residential real estate" Somers and de Roos make the ridiculous statement that:

    "capital growth has averaged almost 10% over the last 900 years."

    Duncan it seems is also a believer in this absurdity.
    \"The overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune.\" - <b>Adam Smith</b> - <i>The Wealth of Nations</i>

    The information you have is not the information you want.
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  2. #22
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    RMB
    Not as absurd as it seems.
    Doubling every 10 years only require a yearly gain of 7.2%!


  3. #23
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    quote:Originally posted by foodee

    RMB
    Not as absurd as it seems.
    Doubling every 10 years only require a yearly gain of 7.2%!

    You forgot to mention that its the banks money you use not your own. macdunk

  4. #24
    Senior Member Halebop's Avatar
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    Since the 1960s the total value of housing stock has increased by 8.9% per annum. While valuations can be out of wack year on year, over a 40+ year series this is a fairly accurate barometer.

    Total housing stock includes:
    Additional housing to cater for population growth
    Larger housing in response to real economic growth per capita
    Additional housing for recreational use (A mixture of demographics and real economic growth)
    Year on year improvements to existing stock by investors, developers and DIY owner occupiers

    Whittle these down and the rate of growth on housing values in the long term is around 7% - I suspect it might even be a little lower than that - perhaps 6.5%.

    Inflation between Q1 1960 and Q1 2006 is a compound 6.5%. Despite perception that property is an inflation hedge, like all asset classes it performs better when the economic stars are aligned and there is significant evidence to show it substantially underperforms during inflationary periods (1979,1988).

    Property is just another asset class. We are entering a period where due to demographics the number of new property investors (1/3rd of residential property is owned by investors) will decline at the same time as baby boomers age and begin to close their chequebooks, downsize or simply sell the rental for something that requires less painting. If the commodity market boom results in inflation getting out of hand you can kiss goodbye to the recent period of outperformance - inflation will kill it like it kills all investment classes.

  5. #25
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    quote:Originally posted by duncan macgregor

    quote:Originally posted by foodee

    RMB
    Not as absurd as it seems.
    Doubling every 10 years only require a yearly gain of 7.2%!

    You forgot to mention that its the banks money you use not your own. macdunk
    You were the one to forget to mention "profit from borrowing the banks money" not me. If indeed, that is what you intended to say.

    You also forgot to include a time span on your "Doubling every 10 years" theory - unlike Halebop whose claim that housing has increased by 6-7% per annum since the 1960s is fair enough.

    But claiming historical gains of 7% for long periods (100+ years, let alone 900+) is just absurd.

    Claiming these types of gains in the future is stretching the bounds of probability as well.
    \"The overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune.\" - <b>Adam Smith</b> - <i>The Wealth of Nations</i>

    The information you have is not the information you want.
    The information you want is not the information you need.
    The information you need is not the information you can obtain.
    The informaton you can obtain costs more than you want to pay.

  6. #26
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    Lets not let a few yarns get in the way of a few facts.

    According to the REINZ the Jan 1992 median NZ Residential Dwelling property sale price was $105,500. In Jan 1997 it was $160,007. In Jan 2002 it was $175,006. By Jan 2006 it was $300,000.

    For DM, section prices were $45,000 in Jan 1992, $65,000 in Jan 1997, $85,500 in Jan 2002 and $140,000 in Jan 2006.

    The data clearly shows that over time property values do increase. What I don’t have is the inflation rate data over this period so what the real increase is I don’t know.

    However at times, property values do fall. For example Section prices in Jan 1998 were $78,500, dropped away and did not recover to until June 1998 (with 2 up months in this period). Dwellings for example in Nov 1997 were at $170,007, dropped away and got back to this level in Dec 1999 (after a few odd months when they rose a bit).

    So what do the data tell me. Firstly timing in the market (entry/staying/exit) does appear to be important - even if you are leveraging one proprty off another.

    Dwellings values increase on the back of land value increases. Therefore dwelling investments are problematic because you have to have enough cash flow to pay the rates and insurance (say $2,000 a year), property repairs (say 4% a year) and any costs of borrowing.

    Sections would seem a better bet. But if you are buying into a subdivision there is probably some covenant that requires you to build within a few years so you break out of the long term good Section trend and end up in the not so good Dwelling trend. Suburban sections have the costs of rates and mowing (say $2,000 a year) which can’t be funded from elsewhere or your DM example of rural land which can be grazed to offset expenses.

    Is there much value in looking at statistics beyond 10 years back? I think not because we do not generally stay with a single property for more than 7 years (I recall). This makes comparisons so much harder – suffice to say values do increase.

  7. #27
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    Good discussion and the 40 year data is helpful. Property does drop occasionally and there can be dead rental periods with no income.

    So timing is important for the greatest benefit. The type and location of property is critical. My belief is that industrial property is the best choice. Any community needs it's car painters, engineers, contractors etc and they can't just park on the street.

    I agree that it isn't always true that property grows 10%pa and indeed my own dismal experience in Invercargill proves that. My house cost $175,000 in 1991. Today it is worth $300,000. Thats a 72% increase over 15 years.

    However my crib in Central has quadrupled over 18 years.

  8. #28
    Senior Member Halebop's Avatar
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    quote:Originally posted by minimoke

    Lets not let a few yarns get in the way of a few facts.

    According to the REINZ the Jan 1992 median NZ Residential Dwelling property sale price...
    The median price tells you what is selling, not what the average value of property is. The REINZ figures are "yarns", not data.

    quote:Originally posted by minimoke

    Dwellings values increase on the back of land value increases. Therefore dwelling investments are problematic because you have to have enough cash flow to pay the rates and insurance (say $2,000 a year), property repairs (say 4% a year) and any costs of borrowing.

    Sections would seem a better bet...
    Sections make the argument for leverage and using other peoples money problematic. They don't provide cashflow. The property investment argument becomes one for property trading and development instead, which is a business just like any other.

    quote:Originally posted by minimoke

    Is there much value in looking at statistics beyond 10 years back? I think not because we do not generally stay with a single property for more than 7 years (I recall). This makes comparisons so much harder – suffice to say values do increase.
    There is barely any value in a 7 year look at property unless you are trading or developing. Demographic trends in real estate last for 20 years or more. Looking at the long term picture helps confirm correlations between inflation and real estate. The real thruth is they basically match each other. There is no significant outperformance.

  9. #29
    Senior Member Halebop's Avatar
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    quote:Originally posted by duncan macgregor

    You forgot to mention that its the banks money you use not your own.
    This requires consistent re-leveraging to maintain returns.

    Let's make some assumptions...
    A major metropolitan market like Auckland with favourable demographics rather than a lower growth, higher income market.
    Capital Growth 7.2% pa
    Income Growth matches capital (not something that has happened in the last 10 years)
    EBIDT 4%
    Interest Rates 8%
    Marginal Tax Rate 39%
    Depreciation Allowance 1.5%
    Reinvest all cash profits but support losses from external sources

    In 20 years time a cash investment of $250,000 into $1,000,000 worth of real estate would be worth...

    Property 4.017m
    Mortgage -0.082m
    Deferred Taxation -0.117m
    Total $3.818m

    ...and have required additional external cash flows in the 1st 3 years of $8,000. Excluding these later monies the Internal Rate of Return is about 14.6%. Not bad, albeit flattered by income growth more than twice what the market has achieved in the last decade. From this point however, annual returns are about 10% per annum and dropping like a stone.

    In order to maintain high returns, leverage must be maintained. So if we refinance at the beginning of each year, purchasing additional property in order to get us back up to 75% debt here's what the math looks like at year 20...

    Property 131.4m
    Debt -91.9m
    Net Annual Cash flow, assuming you can make use of the $2m annual loss, is a loss of $1.289m
    Total pre tax losses are now far in excess of $10m for the life of the portfolio

    Question: All you folk who know rich property investors. Why has nobody appeared on the rich list with a $130m residential property portfolio? Could it be they are really doing something quite different from property investment? Could it be that the metrics of residential property investment are only attractive and sustainable on relatively low sums of money? Could it be that the good buying opportunities, sustained by cash flow, are just not readily available in this market?

  10. #30
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    quote:Question: All you folk who know rich property investors. Why has nobody appeared on the rich list with a $130m residential property portfolio? Could it be they are really doing something quite different from property investment? Could it be that the metrics of residential property investment are only attractive and sustainable on relatively low sums of money? Could it be that the good buying opportunities, sustained by cash flow, are just not readily available in this market?
    Fair point. My observation of residential property investors is that they get rich but it is a relative term. Say $1 million cash after a lifetime. But then there are those who overgear and lose the lot, while others have several million. I'm know one at the moment who might just get his capital back if he is lucky.

    Residential property is hard work and few people in my experience own more than 4 rental properties. So it isn't suprising such investors don't appear on the rich lists.

    In terms of property John Spencer and Howard Patterson come to mind but they both had business investments as well.

    Halebop - your calculations are enlightening - thanks for the effort.


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